Question

You want to find the expected return of your firm using the Fama-French model. The risk free rate is 0.020, and the expected market return is 0.149. The HML factor and the SMB factors have expected returns of 0.039, and 0.038, respectively. You measured the beta on the market, the HML factor, and the SMB factor as 0.6, 1.2, and 0.3, respectively. What is the expected return for your firm?

Answer 1

Please find the solution in the below image

According to Fama and Freuh model Irade & B, 1 rm -rf) + B2 (SMB) + B3 (HML) where, s expected return of fierum or stock &ftrisk free rate ß Factor's wefficients Bebe, So m all vinus big & exuss return of value stocks over growth stocks, SMB - small minus big excess return of small cap companies over large cap companild. HNL High minus low We have, ß37 1.2 rf 0.020 oma 0,149 ß, a ono ß20.3 , SmB no.036 Hmes Oro 39 S + 0.3x0.038 rə 0.020+10.149-0.020) x 0.6 T 1.QX 0.039 ra 0.1556